Decision Date: 07/31/95 Archive Date: 01/17/96
DOCKET NO. 93-16 722 ) DATE
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On appeal from the
Department of Veterans Affairs Regional Office in Manchester,
New Hampshire
THE ISSUE
Recovery of the loan guaranty indebtedness.
ATTORNEY FOR THE BOARD
Michael A. Pappas, Counsel
INTRODUCTION
The veteran served on active duty from November 1963 to
October 1967.
This matter comes before the Board of Veterans' Appeals (the
Board) on appeal from a decision on waiver of indebtedness of
the Manchester, New Hampshire, Regional Office's Committee on
Waivers and Compromises (RO). A December 1992 decision on
waiver of indebtedness denied the appellant's request for a
waiver of his loan guaranty indebtedness in the amount of
$36,132.48, plus accrued interest. The appeal was received
and docketed at the Board in August 1993. The appellant has
represented himself throughout his appeal, and the case is now
ready for appellate review.
The appellant has not challenged the validity of the loan
guaranty indebtedness. Accordingly, consideration is limited
to the issue shown on the preceding page.
CONTENTIONS OF APPELLANT ON APPEAL
The appellant asserts that the RO committed error by failing
to grant a waiver of recovery of his loan guaranty
indebtedness since, essentially, he should not be considered
at fault in the creation of the indebtedness, and the
enforcement of collection will result in an undue hardship to
him.
Specifically, the appellant believes that the RO did not
favorably consider the following mitigating factors: (1) The
appellant made every effort to maintain his mortgage payments
on the VA guaranteed loan under very adverse conditions.
(2) Following the purchase of the subject property, the
appellant lost the job that he had had for 17 years. An
extreme downturn in the local economy made it impossible for
him to find suitable employment in the region in which the
subject property was located. Eventually, he was forced to
move in order to find suitable employment. (3) Prior to his
move from the premises, he communicated with the note holder
and the VA but was offered no viable alternatives to
foreclosure. (4) He explored the possibility of selling the
subject property, but unfortunately, the downturn in the local
economy also resulted in its devaluation making it impossible
to sell for what he owed on the VA guaranteed loan. (4) The
appellant also pursued the acceptance of a deed in lieu of
foreclosure with the note holder. He was informed that he
would have to allow the loan to become six months delinquent
before it would be considered. He saw no value in doing so,
and instead simply vacated the premises and turned his keys
over to the note holder. (5) It should be taken into
consideration that the devaluation of the property directly
increased the appellant's eventual loan guaranty indebtedness.
(6) The appellant indicates that he always pays his debts,
and would like to pay his fair share of this debt. He
believes, however, that requiring full payment would create a
severe financial hardship. He has proposed the possibility of
a compromise repayment plan in which he would pay $20,000 of
the debt over time.
The proper consideration of the foregoing factors should have
led the RO to find that a waiver of the appellant's loan
guaranty indebtedness would not be against the principles of
"equity and good conscience."
DECISION OF THE BOARD
The Board, in accordance with the provisions of 38 U.S.C.A.
§ 7104 (West 1991), has reviewed and considered all of the
evidence and material of record in the appellant's claims file
and loan guaranty file. Based on its review of the relevant
evidence in this matter, and for the following reasons and
bases, it is the decision of the Board that the preponderance
of the evidence supports a partial waiver of recovery of the
loan guaranty debt in the amount of $21,132.48, plus accrued
interest.
The preponderence of the evidence is against waiver of
recovery of the remainder of the loan guaranty debt of
$15,000, plus accrued interest.
FINDINGS OF FACT
1. All relevant evidence necessary for an equitable
disposition of the appellant's appeal has been obtained by the
agency of original jurisdiction.
2. There was a default in the appellant's VA guaranteed loan
necessitating a foreclosure of the subject property resulting
in the appellant's loan guaranty indebtedness of $36,132.48,
plus accrued interest.
3. The appellant was not without fault in the creation of his
loan guaranty indebtedness. The appellant did not contact
appropriate officials of the VA or the lender to attempt to
avoid foreclosure or list the property for sale with a real
estate agent; he merely abandoned the property and turned in
the property keys to the lender.
4. At the time the appellant purchased the subject property
used as security for the VA guaranteed loan in September 1988,
it was appraised at $100,000. Prior to the foreclosure, in
May 1991, it was appraised in "as is" condition at $70,000,
representing a diminution in value of $30,000, from the time
the appellant purchased the subject property. These
appraisals reflected an ongoing devaluation of the subject
property due to the downturn in the local market. Neither the
appellant nor the VA were responsible for this diminution in
value.
5. The veteran was not unjustly enriched to the detriment of
the Government.
6. The appellant's income, with consideration of the costs of
life's basic necessities, is sufficient to permit repayment of
the balance of the loan guaranty indebtedness, not waived
herein, without resulting in undue financial hardship, and
repayment of this portion of the indebtedness would not be
inequitable.
CONCLUSIONS OF LAW
1. There was a loss after default of the property which
constituted the security for the VA guaranteed loan.
38 U.S.C.A. §§ 5107(a), 5302 (West 1991); 38 C.F.R. § 1.965(a)
(1994).
2. A partial waiver of the appellant's loan guaranty
indebtedness in the amount of $21,132.48, plus accrued
interest, is consistent with the principles of equity and good
conscience. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.965(a).
3. Recovery of the remainder of the loan guaranty
indebtedness, in the amount of $15,000.00, plus accrued
interest, would not violate the principles of equity and good
conscience. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.965(a).
REASONS AND BASES FOR FINDINGS AND CONCLUSIONS
The appellant's claim is "well grounded" within the meaning of
38 U.S.C.A. § 5107(a). That is, he has presented a claim
which is not inherently implausible. The Board is also
satisfied that all relevant facts have been properly
developed. Further, there is no indication that there are
additional records pertinent to the appellant's claim which
have not been obtained. Consequently, no further assistance
to the appellant is required to comply with the duty to assist
the veteran mandated by 38 U.S.C.A. § 5107(a).
Factual Background
The documentary evidence before the Board supports the
following factual summary:
In October 1988, the appellant purchased a condominium in New
Hampshire for $99,900, financed by a 10.5 percent VA
guaranteed loan in the amount of $100,850, expending
$4,675.75 in the transaction. Monthly payments, including
taxes, insurance and condominium fees totaled $1,186. In
conjunction with the purchase of the property, the appellant
executed a VA Application for Home Loan Guaranty, VA Form 26-
1802a. In that document, the appellant certified and agreed
to repay the VA for any claim which VA would be required to
pay the lender on account of default under the terms of the
loan. The document also specified that "[t]his debt will be
the object of established collection procedures." In
qualifying for the loan, the appellant reported a monthly
gross pay of $2,980 as an operations supervisor with NH Ins.
Group, for whom he had worked for 15 years. In conjunction
with the purchase, the subject property was appraised in
September 1988 and valued at $100,000.
In his substantive appeal, the appellant indicated that in
February of 1990, he was notified that his company was
reorganizing, and that his position was being terminated. He
stated that he began looking for other employment (initially,
in the same locality as the subject property and later
elsewhere) but met with no success. His employer arranged to
have his home appraised; it was valued in June 1990 at
$62,750, or approximately $37,000 less than he owed on the VA
guaranteed loan. The veteran claims that he visited the
local VA office on at least five occasions seeking advice.
He states that the benefits counselors were friendly but only
moderately informative. They neglected to refer him to the
Loan Guaranty Division that was only one floor above them in
the VA building. He states that the possibility of offering
a deed in lieu of foreclosure was suggested and so he pursued
that option with the note holder. He claims that he was
informed by the note holder that the loan would have to be
six months delinquent; it was suggested to him that he live
in the subject property until that time and then apply. The
veteran stated that in good conscience he could not do that.
The veteran further claims that he was later advised by a
financial counselor that, since the home was worth so much
less than he had paid for it, he should turn the property
back to the bank.
In July 1990, the appellant’s employer wrote a general letter
of recommendation for the appellant. It described the
company’s reorganization as the reason for his termination,
testified to his excellent past performance, and recommended
him for employment.
It appears that the appellant was terminated from employment
on September 1, 1990. In November 1990, the appellant
directed a letter to the note holder notifying them that he
had vacated the subject property. He enclosed the keys and
garage remote control to the property, and informed them of
his forwarding address.
The first uncured default on the loan occurred on December 1,
1990. A Notice of Default and a Notice of Intention to
Foreclose were issued by the note holder to the VA on December
21, 1990. The Notice of Default explained that the appellant
had been unemployed since September, and had said that he was
going to have to leave the state to seek employment.
“Unemployment” was given as the reason for the default. The
Notice also informed the VA that the appellant had sent the
note holder his keys to the property. It requested a waiver
of the four month waiting period for foreclosure.
In January 1991, the Chief of the Loan Service Division of the
local VA office directed a letter to the appellant, notifying
him of the default and impending foreclosure. The letter
expressed the consequences of foreclosure in terms of the
possibility of a future debt to the government, and offered
the appellant financial, vocational, and educational
counseling. In March 1991, the appellant telephoned the VA
and explained the history of the default. The VA
representative explained to the appellant the concept of a
deed in lieu of foreclosure. The appellant stated that he was
not interested, but wanted the VA to contact the note holder
to tell them to expedite the foreclosure.
The loan was referred to the note holder's attorney in March
1991. A liquidation appraisal was conducted on behalf of the
VA in May 1991. The appraiser noted that the property was
well maintained, and estimated that the market value of the
subject property for liquidation purposes, in "as is"
condition was $70,000. The appraiser noted that condominium
market conditions in the area were slow. The VA Loan Service
and Claims Section analyzed the liquidation appraisal in
relation to the original 1988 purchase appraisal of $100,000.
It was noted that the difference in valuations was due to a
sharp market decline in the South New Hampshire condominium
market, and a depressed market in general. Based upon the
liquidation appraisal, the VA did not offer a specified bid to
the note holder.
The subject property was sold at foreclosure in June 1991.
The note holder was the successful bidder for a bid of
$49,000. A claim was made by the note holder to the VA on the
loan guaranty in August 1991 for the maximum amount of the
guaranty. Following payment on the loan guaranty by the VA,
the appellant's loan guaranty indebtedness was determined to
be $36,132.48, plus accrued interest.
Pursuant to his request for a waiver, the appellant has
submitted two financial status reports, dated in July 1992 and
January 1993. Since the latter report is the most recent, it
is obviously more indicative of his current financial status,
and thus more pertinent to whether he has the financial
ability to repay the loan guaranty indebtedness without
incurring an undue hardship. Consequently, this report will
be described in greater detail.
The appellant, who noted that he was divorced, indicated that
he had been unemployed from September 1990 until April 1992.
From April 1992, however, he indicated that he had been
employed in New Hampshire as a computer operator for Blue
Cross/Blue Shield. He reported a monthly net income of
$1,825, after deductions for taxes. He reported monthly
expenses totaling $940, including $350 for rent, $300 for
food, and $100 for clothing. After payment of monthly
expenses, he showed a positive net balance of $885, of which
he indicated that he could allocate $125 toward his VA loan
guaranty indebtedness. His reported assets included an
automobile, valued at a total of $4,000, cash in the bank in
the amount of $3,689, and one-half ownership of a Honda
motorcycle, valued at $2,000. The value of his assets totaled
$9,689. He listed no debts. The VA loan guaranty
indebtedness, however, was not included in his list of debts.
He reported that, because of his job, he would be moving from
Concord to Manchester, New Hampshire, where he would be
renting an apartment for about $650 per month and incur
additional start-up rental and housekeeping expenses.
In May 1993, the VA rejected a compromise offer from the
appellant of 13,000, at $3,000 down, plus $100 per month until
paid. It was suggested by the VA, however, that a lump sum
offer of $20,000 would be considered. In May 1993, the
appellant submitted another offer to the VA in the amount of
$20,000, at $3,000 down, plus $150 per month until paid. In
June 1993, this offer was rejected by the VA, because, "it
[was] not advantageous for the VA to accept."
Analysis
The law and regulations authorize a waiver of collection of a
loan guaranty indebtedness from an appellant where he has been
found to be free from an indication of fraud,
misrepresentation, or bad faith, and both of the following
factors are found to exist: (1) After default there was a
loss of the property which constituted security for the loan,
and (2) collection of the indebtedness would be against equity
and good conscience. 38 U.S.C.A. § 5302(b); 38 C.F.R.
§ 1.964(a).
The standard "equity and good conscience" will be applied when
the facts and circumstances in a particular case indicate a
need for reasonableness and moderation in the exercise of the
Government's rights. The decision reached should not be
unduly favorable or adverse to either side. The phrase
"equity and good conscience" means arriving at a fair decision
between the obligor and the Government. In making this
determination, consideration will be given to the following
elements, which are not intended to be all-inclusive: (1) The
fault of the debtor, (2) balancing of faults between the
debtor and the VA, (3) undue hardship of collection on the
debtor, (4) a defeat of the purpose of an existing benefit to
the veteran, (5) the unjust enrichment of the veteran, and,
(6) whether the veteran changed positions to his detriment in
reliance upon a granted VA benefit. 38 U.S.C.A. § 5302;
38 C.F.R. § 1.965(a).
The RO found the appellant to be free from an indication of
fraud, misrepresentation or bad faith, and the Board concurs
with that preliminary finding. In the evaluation of whether
equity and good conscience necessitate a favorable waiver
decision, the Board must consider all of the specifically
enumerated elements applicable to a particular case. However,
as intimated by the decision of the RO, the issues of fault
and undue financial hardship are more significant to the
instant case. Furthermore, although not an explicit element
of equity and good conscience, the Board also looks to whether
the appellant attempted to mitigate the amount of the
indebtedness.
VA's working definition of "fault" is "The commission or
omission of an act that directly results in the creation of
the debt." (Veteran's Benefits Administration Circular 20-90-
5, February 12, 1990) Fault should initially be considered
relative to the degree of control the appellant had over
circumstances leading to the foreclosure. If control is
established, even to a minor degree, the secondary
determination is whether the debtor's actions were those
expected of a person exercising a high degree of care, with
due regard for the debtor's contractual responsibilities to
the Government. The age, financial experience and education
of the debtor should also be considered in these
determinations.
In the present case, notwithstanding the fact that the
appellant’s employment termination was involuntary and not
for “cause”, and despite the fact that he moved away from the
subject property in order to enhance his employment
opportunities, the appellant was at all times in direct
control of the subject property and debt obligation. Though
he claims to have contacted VA benefits counselors regarding
the loan, there is no record of his contacting VA or the
lender to work out an arrangement regarding the loan or to
offer a deed in lieu of foreclosure to mitigate VA’s loss.
In fact when the possibility of a deed in lieu of foreclosure
was mentioned in March 1991, the veteran indicated that he
was not interested.
Utilizing the VA guaranteed loan, the appellant had been able
to purchase the subject property under favorable conditions.
Normally, one could have expected the subject property to
appreciate in value. Based upon the failing economy of the
region, this did not come to pass. However, the VA should not
be expected to ensure the continued appreciation of the
property in addition to guaranteeing payment on the loan
obligation. The appellant's responsibility for payment under
that loan obligation was not contingent upon the continued
economic health of the region in which the property was
situated or whether it was advantageous for him to maintain
his loan payments. This is so, even though the appellant
certainly was not responsible for the economic downturn he
experienced in New Hampshire. The appellant was under direct
control of the financial situation, and it was incumbent upon
him to take those actions expected of a person exercising a
high degree of care, with due regard to his contractual
responsibility to the Government. However, instead of
discussing ways to avoid foreclosure or mitigate any damages
to the lender or VA, the veteran simply abandoned the property
when he could make no further payments on the loan and
forwarded the keys to the lender. Furthermore, he failed to
adequately pursue advice from the VA, and did not actively
pursue the acceptance of a deed in lieu of foreclosure.
The appellant may argue that his fault is totally excusable
because he made every conceivable attempt to continue to
fulfill his contractual obligation to the VA under adverse
conditions, even after experiencing very discouraging
employment problems. His prior efforts to maintain his
mortgage payments in current status, while relevant to
mitigation, are not the critical issue; the total abandonment
of his contractual obligation under the loan is. By
definition, and under all accepted criteria, the appellant
must be considered at fault.
Notwithstanding this conclusion, the Board may take into
consideration all mitigating factors, and a finding of fault
can be tempered by a finding that the appellant made
substantial efforts under adverse conditions to minimize the
loan guaranty indebtedness. The appellant made a sincere
effort to maintain his mortgage payments in current status
under adverse conditions for several months prior to his
vacation of the premises. He has documented the financial
problems that he overcame in order to do so. When he
concluded that his employment opportunities were non-existent,
rather than trying to take advantage of the situation and live
in the subject property “rent-free”, he immediately vacated
and sent the keys to the note holder. He has indicated that
he did this to mitigate any loss caused by the foreclosure.
Finally, although the appellant made no effort to avoid the
foreclosure through the marketing of the subject property, it
is clear that he had been justifiably discouraged from doing
so because of the gross diminution in property values.
Although he demonstrated a marked lack of understanding and
financial sophistication in the process, he at least made some
efforts towards minimization of the indebtedness. His actions
are consistent with our end determination and arrival at a
substantial reduction of the appellant's indebtedness through
a partial waiver.
The Board has reviewed the record to determine if there exists
other factors, outside of the appellant's control, which
contributed to the creation of the indebtedness. It appears
from an analysis of the appraisals of the property that the
appellant's problems coincided with the economic troubles in
the region. The Board has no reason to question the
reliability of the appraisals contained in the loan guaranty
file. At the time of the appellant's purchase in 1988, the
subject property was appraised in "as is" condition for
$100,000. Prior to the foreclosure in 1991, the subject
property was appraised in "as is" condition for $70,000,
representing a diminution in value of $30,000.
The Board has indicated that the VA should not be expected to
ensure the continued appreciation of the property in addition
to guaranteeing payment on the loan obligation. In light of
the substantial mitigating factors outlined above, however,
the Board believes that the appellant may be spared from the
complete impact of the spiraling depreciation in property
values. Affording the appellant the benefit of all reasonable
doubt in this analysis, the Board believes that it would not
be unduly favorable or adverse to the appellant or the VA to
waive a portion of the appellant's loan guaranty indebtedness
that could be directly attributed to that severe $30,000
depreciation.
Prior to an equitable ascertainment of the amount of the
indebtedness that should be waived, and the amount that can be
collected, it is incumbent upon the Board to analyze the
financial data provided by the appellant and determine if
collection of the loan guaranty indebtedness not waived herein
would seriously impair his ability to provide himself with the
basic necessities of life. The Board is particularly mindful
of the principle that the appellant is expected to accord a
debt to the Government the same regard given to any other
debt. It is noted that he, in fact, has no significant
secondary indebtedness.
It is also noted that a substantial portion of the appellant's
income results in a monthly surplus. Furthermore, the proper
analysis of undue hardship must take into consideration not
only the appellant's present financial picture but also a
realistic projection of his status in the foreseeable future.
The appellant is relatively young and trained in a marketable
field; he is now employed and has proven himself to be
flexible and resourceful. He can reasonably expect to have
many more years of substantially gainful employment. He
should be able to repay the indebtedness not waived herein
over time without significantly impairing or curtailing
funding for the basic necessities of life.
In what must be considered to be a genuine acceptance of
responsibilities for his past actions, the appellant on two
occasions has sought a compromise of his indebtedness. His
concept of compromise affords the VA a glimpse of that which
he believes would be financially palatable. In addition to
the $3,000 “lump sum” down payment that the appellant proposed
in his counter-compromise offer, he indicated that he could
pay $150 per month. It appears from the record, however, that
the appellant could conservatively afford a minimum monthly
payment of $200 and still be able to afford all other quoted
expenses for necessities. Typically, loan guaranty debts are
paid off over a five-year (60 month) period. On that basis, a
realistic projection of the appellant's foreseeable financial
status is that, in addition to the down payment of $3,000, he
would be able to pay $200 per month, over that five-year
period, toward the loan guaranty indebtedness. Including the
down payment, the collectable amount would total $15,000.
This is not to say that he will not experience certain
inconveniences as a result of the payment of the indebtedness
to the Government. Obviously, additional finances would be
beneficial to his quality of living. There is no evidence,
however, that he will be forced to endure a lack of food,
clothing, warmth, or shelter as a result of the collection of
this portion of the debt.
In according the appellant a substantial partial waiver of his
loan guaranty indebtedness in the amount of $21,132.48, plus
accrued interest, the Board has taken into consideration the
responsibility he accepted upon obtaining the advantageous VA
guaranteed loan, the hardships the appellant has endured, his
attempts at mitigation of the amount of the indebtedness, the
appellant's current financial status, and the economic climate
in which the loan guaranty indebtedness was created. It also
must be noted that the Government has incurred a significant
loss in this transaction. The Board finds that a
preponderance of the evidence substantiates that it would not
be against the principles of equity and good conscience to
recover the remainder of the appellant's loan guaranty
indebtedness not waived herein, in the amount of $15,000, plus
accrued interest. 38 U.S.C.A. § 5302; 38 C.F.R. § 1.965(a).
ORDER
Waiver of recovery of part of the appellant's loan guaranty
indebtedness in the amount of $21,132.48, plus accrued
interest, is granted.
Waiver of recovery of the remainder of the appellant's loan
guaranty indebtedness in the amount of $15,000.00, plus
accrued interest, is denied.
THOMAS J. DANNAHER
Member, Board of Veterans' Appeals
The Board of Veterans' Appeals Administrative Procedures
Improvement Act, Pub. L. No. 103-271, § 6, 108 Stat. 740, ___
(1994), permits a proceeding instituted before the Board to
be assigned to an individual member of the Board for a
determination. This proceeding has been assigned to an
individual member of the Board.
NOTICE OF APPELLATE RIGHTS: Under 38 U.S.C.A. § 7266 (West
1991), a decision of the Board of Veterans' Appeals granting
less than the complete benefit, or benefits, sought on appeal
is appealable to the United States Court of Veterans Appeals
within 120 days from the date of mailing of notice of the
decision, provided that a Notice of Disagreement concerning
an issue which was before the Board was filed with the agency
of original jurisdiction on or after November 18, 1988.
Veterans' Judicial Review Act, Pub. L. No. 100-687, § 402
(1988). The date which appears on the face of this decision
constitutes the date of mailing and the copy of this decision
which you have received is your notice of the action taken on
your appeal by the Board of Veterans' Appeals.
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